Abstract: the company released its fiscal year 2017 results on March 28th and held an analyst meeting on March 29th. Fiscal year 2017 was a year of recovery for the company's business. After the consolidation of Scholz, the company's total revenue in 2017 increased by 475.8% compared with the same period last year. Compared with the same caliber income, the income increased by 51.6% over the same period last year. The company made a net profit of HK $427 million in 2017 (a net loss of HK $440 million in 2016). If some one-time items are deducted, the recurrent net profit will reach HK $322 million. We expect its total revenue to grow by 14-16% a year in 2018-19, mainly driven by business in Europe and the United States. After regaining orders from old customers and further improving operational efficiency, the company's profit margins are expected to expand further and drive earnings growth of more than 20-40% a year from 2018 to 2019. With the expansion of the company's business scope and business integration in the industrial chain, the impact of China's ban on the import of Category 7 metal scrap from 2018 should also be limited. With the company's strong technology, the company will become the main beneficiary of the supply-side reform of China's metal recycling industry in the long run. According to our estimates, the company currently has a limited valuation advantage over its global peers, but we believe there is room for upward adjustment in earnings forecasts. We recommend that investors put the shares on the watch list and pay attention to whether there will be sustainable earnings growth in 2018 and beyond.

The business recovery process is on track. The company's revenue growth in 2017 is driven by both its China business and its Scholz business. Gross profit margin increased from 6.8% in 2016 to 12.6% in 2017, mainly due to: 1) the expansion of gross profit margin of China and Scholz business due to the improvement of capacity utilization and operational efficiency; 2) the consolidation of high-margin Scholz business. Taking into account Scholz, the environmentally friendly gross profit margin expanded from 10.7 per cent in 2016 to 12.6 per cent in 2017. Sales and management costs as a share of total revenue fell from 10.1% in 2016 to 9.5% in 2017. Sales and management costs as a share of total revenue fell to 7.1 per cent from 9.1 per cent in 2016, offsetting the increase in sales costs. As profit margins expanded, the company shifted from a loss in 2016 to a profit in 2017. Net profit in 2017 reached HK $427 million, compared with a net loss of HK $440 million in 2016. Excluding gains on one-time sales and impairment losses, recurrent net profit reached HK $322 million, laying the foundation for sustainable profit growth in 2018 and beyond. The company's net debt-to-equity ratio fell from 82.3% at the end of 2016 to 63.0% at the end of 2017. Whether or not Scholz is taken into account, the cash turnover period of Qili Environmental Protection in 2017 is better than that of 2016 (figure 2).

Business in Europe and the United States will help offset the short-term weakness in China. The acquisition of Scholz will help the company expand its business in Europe and the United States. In 2017, China accounted for only 26 per cent of its total revenue, compared with 63 per cent in Europe and 11 per cent in the US. The acquisition also helps the company secure the supply of upstream waste materials with greater bargaining power, as it can bypass external suppliers by using Scholz's procurement networks in Europe and the United States. Therefore, even if China restricts imports of category 7 scrap metal from 2018, the impact on the company's China business should be limited. First, Europe and the United States have become the main drivers of the company's growth. After gradually taking orders from old customers, the business in Europe and the United States can achieve further revenue growth. As utilization and operational efficiency improve, profit margins are also expected to improve and drive faster net profit growth in both of the company's businesses. Second, the company can use the capacity of its EU and US plants to recycle metal scrap, and then recycle the finished products to China, while finding a location outside China to build new plants for its category 7 metal recovery business. at the same time, improve the ability of Taizhou plant to deal with domestic procurement of scrap metal raw materials in a way of improving automation. Companies can also increase trading activities for category 6 products that are not subject to quota restrictions. Scholz can help ensure the import of category 6 products. Overall, we expect its overall revenue to grow by 14-20 per cent year-on-year in 2018-2019, and net profit to grow by 20-40 per cent a year over the same period.

The company is in a good position to enjoy the huge growth opportunities brought about by the vigorous development of China's metal recycling industry. The central government has increased controls on imports from the scrap metal recycling industry and non-compliance with metal recycling. The government conducted a large-scale inspection in the second half of 17 years to address violations and non-compliance with environmental regulations in China. Since 2018, the company has imposed stricter import restrictions on category 7 scrap metal. Due to the stricter regulatory environment, China's resource recovery industry will speed up its integration. Qihe Environmental Protection, as a leading company, should continue to maintain its leading position in the industry and benefit from the huge growth opportunities of China's resource recycling industry in the long run. The company expects the central government to speed up legislation on resource recovery, especially the development of automobile scrapping activities.

Valuation: the company's shares are up 5.9% so far this year, while the Hang Seng Index is down 1.4% over the same period. We believe that the market is still not fully aware of the process of the company's earnings recovery in 2017, as few investors have noticed the stock. Even some investors who are aware of the company's business restructuring and turnaround in 2017 are still taking a wait-and-see attitude. According to our earnings forecast, the stock currently trades at 17.7 times 2018 earnings, 12.0 times 2019 earnings, 1.3 times 2018 price-to-book, and 1.2 times 2019. The company currently has a limited valuation advantage over its global peers (figure 9), but we believe there is room for upward adjustment in our earnings forecasts for 2018 to 2019. Our current forecasts for the company's business in China, Europe and the United States are quite conservative. We recommend that investors put the shares on the watch list. If the company achieves higher-than-expected revenue and earnings growth, there will be room for revaluation.

Risk factors: commodity price risk, foreign exchange risk, regulatory risk.